Dividend Valuation Model Overview

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12 Questions

What happens to the stock value if the cash flow (D or g) increases?

The stock value increases

What does the term $D_1/V$ represent in the equation $r = D_1/V + g$?

The expected dividend yield of the stock

What type of companies is the constant-growth model best suited for?

Mature, dividend-paying companies with steady growth

What happens to the stock price if the required rate of return (r) decreases?

The stock price increases

What does the constant-growth model capture regarding the components of a stockholder's total return?

Both the dividend and capital gain components

What type of companies are likely to have fairly predictable growth rates in earnings and dividends?

Large-cap and mature mid-cap companies

Which model assumes that dividends will not grow over time?

The zero-growth model

What is the formula used to calculate the value of a share of stock in the constant-growth dividend valuation model?

Value of a share of stock = Next year's dividends / (Required rate of return - Dividend growth rate)

What is the condition for the dividend growth rate (g) in the constant-growth dividend valuation model?

g must be less than the required rate of return (r)

Does the constant-growth dividend valuation model assume that the investor will hold the stock forever?

No, the model does not make any assumptions about how long the investor will hold the stock

What does the constant-growth dividend valuation model assume about the growth rate of dividends?

The dividends will grow at a constant rate forever

If the investment horizon has no bearing on the computed value of a stock, what does this imply about the value calculated using the constant-growth dividend valuation model?

The calculated value will be the same regardless of the investment horizon

Learn about the Dividend Valuation Model, which considers a growing stream of dividends. This model assumes that dividends grow over time at a specified rate, providing a new perspective on stock valuation.

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